SEFA 2019/20 Annual Report; Localization Framework Programme: DSBD briefing; DSBD BRRR

Meeting report

Small Enterprise Finance Agency SOC Limited (SEFA) audit report 2019/20

Ms Kelello Hlajoane, Director, SNG Grant Thornton, briefed the Committee on the audit of SEFA for the year ended 31 March 2020 and regulatory audits of SEFA. She outlined several focus areas where risk was perceived in the statutory audit. These included the risk of fraud in revenue recognition; the implementation of IFRS 16 lease accounting standards; and the risk of financial statement misstatement as a result of COVID-19.

Other risks included the valuation of unlisted investments; impairment of financial instruments in terms of IFRS 9; unearned risk and outstanding claims reserves; and the existence and Valuation of Properties; and Compliance with laws and regulations.

A regulatory audit was conducted into issues of compliance; human resources; financial viability; unauthorised, Irregular and wasteful expenditure; governance and oversight; procurement management; predetermined objectives; and National Credit Act compliance.

She noted several issues which, however, fell within predetermined limits of materiality. These included impairments, which were overstated or non-compliant with IFRS 9 provisions; a legal settlement agreement of R6 million in respect of outstanding management fees; and recognition of a bank account in SEFA’s name that did not relate to SEFA.

The regulatory audit found no instances of material compliance deviations. It found that key positions were not vacant for more than 12 months. There was a high level of loans outstanding due to legacy direct loans by SEFA’s predecessor, Khula. An amount of R209 million in bad debts was written off in 2020. Of this, 70 percent was due to the Khula legacy.  A revenue dip was to be expected in 2021 due to lower rates of interest.

Discussion

Mr G Hendricks (Al Jama-ah) welcomed the presentation. He asked why the bank account was in SEFA’s name, whether there had been a lot of transactions in that account and whether it was possible to find out where the income and expenditure had gone. He asked whether the auditors were satisfied that there were no ghost workers and whether the bank accounts of employees were well verified.

Mr F Jacobs (ANC) also appreciated the presentation. Mr. Jacobs asked a question around the issue of the 70 percent of loans written off.  He noted that this was quite a huge amount that could just be written off like that, a sentiment echoed by the Chairperson. Mr Jacobs said he sensed financial stability if the recommendations in the report were to be followed. He said he was concerned that access to financing, especially for small businesses, was a problem as banks did not heed class to make money available to people with businesses. SEFA was the only source of funding. Since its funds were limited was the money being spent wisely?  The rate they are lending it at? He reiterated that he was asking this question because R209 million in bad debt was written off and he did not want to see that being repeated.

The Chairperson asked if there was an internal audit function in the department and what the implications were, because internal audit was a day to day activity.

Responses

Responding, Ms Hlajoane said the bank account in question was used by Khula Business Premises and the account should be in its name. There had been an oversight in the transfer of functions between SEFA and Khula. However, there was nothing untoward because all transactions in that account related to the business of Kula Business Premises, which was property management. There is no suspicion of fraud from their side.

She could not answer the question about ghost employees with any certainty. Because of the Covd-19 pandemic, physical checks could not be carried out. On verifying bank accounts, she said they relied on the actual bank statements which showed to which accounts the money was going. 

Ms Hlajoane said the 70 percent write off related to direct loans. These were very low loans to non-paying debtors. Management was not just writing off the loans. A motivation had been put forward to recover this money. She hoped they could find a way out of writing it off so that they did not set a bad precedent.

On whether the money was being spent wisely, she said it was spent as agreed in the corporate plan. The audit did not find instances where money was spent inappropriately. Everything was above board.

SMME-focussed Policy Framework Localisation Programme: Department of Small Business Development

Mr Mzi Memani, Director: Enterprise Development, Department of Small Business (DSBD), presented. He said Cabinet had decided to adopt an approach of industrialszation through localisation in order to rebuild the production economy, create jobs, and transform the ownership patterns of the South African economy.

SMMEs were the largest category of businesses in South Africa. It was estimated that there were between 2.4 million and 3.5 million, with the largest number at the informal and micro level of business activity. There was a need to expand the participation of previously disadvantaged enterprises in the mainstream economy. The DSBD was assigned the responsibility of developing a localisation policy in the 2019 to 2024 Medium Term Strategic Framework (MTSF).

Mr Memani said the programme sought to provide a framework for accelerating participation of SMMEs in the localisation programme, in particular rural and township-based manufacturing enterprises. It aimed to target specific products and services and support production or manufacturing by SMMEs. It advocated for high tariff protection and public sector procurement set-asides for such products. The programme aimed to prepare SMME-manufactured goods for the export market and improve South |Africa’s balance of trade. It aimed to foster changes in the structure of the manufacturing sector towards more high-tech manufacturing and to provide a framework for coordinating public and private sector support for SMME participation in the localisation programme.

The programme sought to implement a focused manufacturing programme to build and support SMME participation in the manufacturing value chain for purposes of localisation  based on the following principles: accelerating township and rural enterprises in the manufacturing value chain; intensifying SMME participation in light and fast consumer goods manufacturing; facilitating the participation of SMMEs in minerals beneficiation; and revitalisation of dormant industrial production infrastructure.

The prioritised focus areas for the manufacturing programme were:

- The food and beverages industry including agro-processing – for purposes of food security; - Furniture and general use products

- Pharmaceuticals and nutraceuticals – for purposes of self dependence and health interests of the continent;

-the clothing, leather and textile sector;

-Beauty and personal care products;

- Pulp and paper products;

- Petroleum and chemical products;

- Plastic and plastic products.

Mr Memani emphasised the public sector remained the largest consumer of goods and services. Therefore, the promotion of localisation through public procurement was paramount. National Treasury reported that the government spent over R800 billion on goods and services alone in the 2018/ 2019 financial year and this excluded spending by states-owned entities and municipalities. Given the size of the market that was serviced by township, rural and informal micro businesses, these enterprises could serve as a critical route to market for other SMMEs.

The DSBD had started a programme to provide critical market access to emerging producers as they prepared to replace imports in South Africa and grow trade with the rest of the African continent. The DSBD listed SMME products with participating wholesalers for sale through spaza shops, general dealers, and auto spares providers.  The DSBD had also commenced listing of SMME products with retailers. It was working to establish products and trade markets in townships and rural towns to serve as markets for SMME products. The first pop-up markets would be operational by December 2020. 

Both government and big business must commit to a coordinated funding approach and to making other contributions towards successful implementation of the programme. The government must institute clear and reasonable protection measures for local industries. Large suppliers and retailers must commit shelf space in a manner that was predictable and affordable to SMMEs. Product designation must also include fast-moving consumer goods (FMCG) products as they would have a direct impact on the consumption patterns of South Africa. An Import Replacement Plan should accommodate a transition from assembly-based to full manufacturing and the building of local capacity.

A localisation drive through beneficiation in the mining sector and heavy electricity consumption sectors would require a government decision on managed electricity prices for such industries based on the economic benefits for the country.

Discussion

Mr H Kruger (DA) thanked the Department for the presentation. He said that for the first time in the six years he had been sitting in the Committee, he felt things were moving in the right direction to assist small business. He agreed with the recommendations and wanted to add another one - that the localisation drive must include a detailed red tape reduction strategy to make it easier to do business.

Mr Hendricks said some time ago, the President announced that 1 000 locally produced products would be designated for procurement from SMMEs. There were now 100 products listed and that was a great start. He said he was impressed with the hard work the department was putting in. This created a feeling of excitement. He was worried that opportunities would not reach rural areas and townships. There was a need for Members to go ahead and increase the footprint of the Small Enterprise Development Agency (SEDA) and SEFA in their areas. Their job as Members of Parliament was to open Parliament to the streets. What was missing from the report was how the Department was going to support small businesses that were not listed with big retailers. These supermarkets would list your product but would expect you to advertise on TV, radio, or newspapers. That was something the Committee should think about. A special fund should be considered to help small businesses to advertise their products on TV and radio, a point echoed by the Chairperson.

Ms K Tlhomelang (ANC) welcomed the presentation and noted that small businesses were key drivers of economic growth and job creation in developing countries such as South Africa. There was a need to build the manufacturing capacity of these small businesses as some were facing challenges in meeting demand. She asked the Department how it was going to deal with the big obstacle that small businesses faced in terms of capacity. She also asked how they were going to monitor implementation of all the recommendations.

Mr E Myeni (ANC) said he was happy that 100 products had been listed. And that the majority of the products were owned by black women. The localisation  programme was impressive, but he was worried that it would not reach rural communities. What was the department going to do with marginalised communities? He concurred with Mr Hendricks that there was a need to assist small businesses to advertise their businesses.

Mr Z Mbhele (DA) referred to Japan’s one village one product idea in which every small village identified a unique advantage in being a product hub. This approach was useful in plugging rural areas into the mainstream economy. He asked if the department had that policy in mind.

Ms B Mathulelwa (EFF) said there was a need to develop small businesses in rural areas so that they became retailers and suppliers, but she was afraid that we are becoming retailers only. Some needed to produce, and it was the job of the department to capacitate them to do this.

Mr Jacobs thanked the Department for the presentation and noted that on localisation there was a need to ensure that the level of one product, one village was reached, as noted by Mr Mbhele. He reiterated that a lot of advocacy work was needed to make this program benefit the rural areas. The Committee needed to reach a point where they named and shamed those companies that refused to support small businesses. He asked the department to provide an ongoing report on the monitoring of companies.

Prof C Msimang (IFP) thanked the Department for an eye-opening presentation. He said the localisation  approach was important in creating jobs. The information provided in the presentation should be made accessible to potential businesspeople.

Responses

Mr Lindokuhle Mkhumane, Acting Director-General, DSBD, responded that the Department was pleased that Members were happy. He noted that they had always indicated in their reports that support given to small businesses should not only be focused on urban areas but should also be channeled to rural communities. To address that, they wanted to implement a small business support plan and go to those areas. In September alone they had had 64 engagements and would continue to do that. They would also use the District Development Model (DDM) to make sure marginalised groups were not left out.

He told the Committee that he has heard from some big companies that some small businesses could not produce in large enough quantities. They had been asked to give the Department the names of these companies so that the Department could assist them with its manufacturing programme.

On advertising, the Department was going to engage Proudly South Africa to assist. On the issue of capacity, a structure had been set up through the private sector to push the expansion of incubation hubs.

Mr Mkhumane said the Small Business Support Plan gave details on how many small businesses the department had to support. Localisation was going to target those areas. They were proposing a cluster approach as well as cooperative groups which would come together to produce a product and then rope in a company to do packaging and marketing. He said most big retailers had been supporting small business products through in-store advertising but the department also needed to support them and not leave them to rely only on retailers.

Budgetary Review and Recommendation Report of the Portfolio Committee on Small Business Development

The Committee’s Content Advisor went through the report with the Committee but advised that the document was too long, and he was not going to go into detail. He said the BRRR process was taking place under very trying conditions due to the ongoing Covid-19 pandemic. The proclamation of a national state of disaster was made 15 days before the end of the 2019/2020 financial year, and ought not to have thwarted the DSBD from fulfilling its objectives or deliverables as outlined in the 2019/2020 Annual Performance Plan (APP). However, it should also be remembered that South Africa’s general elections were held on 8 May 2019. There was, therefore, an element of disruption as the state was transitioning from the fifth to the sixth administration. As a consequence, departments and state-owned entities could only table their strategic plans and APPs to Parliament during July.

The Committee was advised that the BRRR consisted of seven sections.

Section one briefly outlined the mandate of the Committee and the DSBD,the purpose of the report, and the methodology followed in preparing the report.

Section two set out the key policy focus areas for the DSBD. This included an overview of the relevant national priorities as outlined in government policies and plans such as the National Development Plan, the Medium-Term Strategic Framework, and the State of Nation Address, and what the Department had to contribute in achieving them.

Section three revisited the 2018/19 BRRR recommendations to ascertain what implementation there had been.

Sections four and five considered the Department’s and its entities' financial and nonfinancial performance against its allocation for the financial year 2019/2020. Unlike the previous financial years where annual reports were used as source documents, this year’s BRRR report considered all four quarterly reports in determining the performance, including programme performance and key performance indicators of the Department and entities.

Section six of the report discussed the Committee's observations and perspectives on the quarterly reports of the Department and entities with regard to its mandates, strategic objectives, and core issues previously and currently identified by the Committee.

Discussion

Mr Kruger said the report should include the issue of investigations into corruption in the department and should state that the Committee had to monitor the implementation of the recommendations.

The report was adopted.

The Chairperson adjourned the meeting after consideration and adoption of minutes.